VeriSign Q3FY14 Preview: Company Strives To Regain Growth In The Face Of Competition

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VRSN: Verisign CA logo
VRSN
Verisign CA

VeriSign (NASDAQ:VRSN), the leader in the Domain Name System (DNS) market with a 47% market share, is set to release its third quarter earnings for the financial year 2014 on October 23rd. VeriSign is the authoritative registry service provider for all .com and .net gTLDs (Generic Top-Level Domains), as well as the sole registry service provider for gTLDs like .cc, .tv, .gov, .jobs, .edu and .name.

The company registered a 5% increase in sales in the first half of 2014, with revenues of $499 million as against revenues of $476 million for the corresponding prior-year period, when in fact it was growing annually by 10%. This slowdown in the growth rate was primarily due to saturation in the .com domain, a fall in the renewal rates for .com and .net, and a rising demand for a large number of long awaited country code top-level domain names (ccTLDs) and other new generic top-level domains (gTLDs). The company expects the FY 2014 revenues to be $1.003 billion to $1.012 billion with an annual growth rate of approximately 4% to 5%. The non-GAAP gross margin is expected to be at least 80% and with a non-GAAP operating margin  of 59% to 61%.

Our price estimate of VeriSign at $55.33 is at a 1.4% discount to the current market price. We will update our valuation after the Q3 2014 earnings release.

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Domain Name Saturation, Declining Renewal Rates, And Growth In ccTLD Leads To Declining Growth

The .com domain name has be come increasingly saturated in recent years, causing limits to new additions. In Q2 2014, after processing around 8.5 million registrations, only 0.42 million net additions could be made to the .com domain root zone. In contrast, 1.22 million net additions were made in Q2 2013. This decline might be further compounded by the price hike in the .net domain annual fee from $6.18 to $6.79 beginning February 2015. The total base of active registered domain names, at the end of June 2014, stood at 128.9 million (113.7 for .com and 15.2 million names for .net), representing a 3.7% year-on-year growth.

The .com and .net renewal rate for the Q1 2014 was 72.6% compared to 73.2% in Q1 2013. Renewal rates cannot be measured until 45 days after the end of quarter. VeriSign estimates the Q2 renewal rates were 71.7% as against 72.7% for the same period last year. Management attributed this decline mainly to changes in search algorithm, lower first-time renewal rates in certain geographies, and the promotions by previous year registrars (or lack thereof).

The slowing growth has been further exacerbated by the growth of .ccTLD domain registrations in non-US markets. The .ccTLD is growing in popularity amongst companies due to the favorable government policies regarding their adoptions. The ccTLDs can only be used by countries and territories. An increasing number of businesses, especially SMEs, are migrating to this domain because of policies intended to encourage their adoption.  These include  a registration requirement relaxation, free domain names subject to specific usages, and so on. In its Q1’14 Domain Name Industry Brief , VeriSign reported that .ccTLD registrations have grown at more than thrice the growth rate of the .com and .net domain names.

VeriSign Increases Marketing Spend To Sustain Top Position

VeriSign has increased its year-on-year marketing spend by 6% to $44 million in the first half of 2014. The company expects the marketing expenditure to rise over the coming quarters. The company channels the majority of its marketing campaigns through affiliate registrars such as GoDaddy and BigRock, or other resellers to promote its .com and .net domain registrations and drive awareness for the brand across geographies. It has also applied for International Domain Names (IDN) for overseas market. Hence, once they’re available, it plans to spend on partnering with overseas registrars for the marketing of its offerings.

Recently Google announced to act as a registrar and sell a package of services, including domain names, with the aim of developing online presence for smaller businesses in the US. The .com and .net domains would be amongst its offerings. Hence, the management believes that Google acting as a “retail outlet” for their products will greatly aid in expanding its reach.

Long Term Sustainability of gTLD Remains Questioned

According to VeriSign, there are some uncertainties regarding the long term growth of new gTLDs. The gross registrations for the first half 2014 is over 1.6 million. They haven’t gone through a renewal cycle yet to arrive at a net figure. The growth has been rapid with a lot of sales of premium domain names. A majority of registrations is suspected to have been done by speculators. Speculators buy popular domain names to sell them for a profit later on. Hence the sustainability of these gTLDs is definitely a question which only time can answer.

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